Good morning. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta Inc. 2016 Q4 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. Robert Buckley, Chief Financial Officer, you may begin your conference.

Thank you. Good afternoon and welcome to Novanta’s fourth quarter 2016 earnings conference call. I’m Robert Buckley, Chief Financial Officer of Novanta. With me on today’s call is Chief Executive Officer, Matthijs Glastra. If you’ve not received a copy of our press release issued today, you may obtain it from the Investor Relations section of our Web site at www.novanta.com. Please note this call is being webcast live and will be archived on our Web site. Before we begin, we need to remind everyone of the Safe Harbor for forward-looking statements that we’ve outlined in our earnings press release issued earlier this morning, and also those in our SEC filings. We may make some comments today both in our prepared remarks and our responses to questions that may include forward-looking statements. These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future even if our estimates change. So, you should not rely on any of today’s forward-looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment in our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP measures in the earnings press release, we will provide reconciliations promptly on the Investor Relations section of our Web site. I’m now pleased to introduce Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Robert. Good morning, everybody and welcome to our call. We're very pleased with our fourth quarter results, as our team continued to execute well. Our business delivered 10% reported and organic revenue growth with strong operating cash flows and profitability. Our revenue was $99 million and our operating income from continuing operations more than doubled versus last year. We beat our adjusted EBITDA guidance with an adjusted EBITDA of $19.4 million or roughly 20% of sales, which is 35% growth year-over-year. Our GAAP earnings per share were $0.22 and our adjusted earnings per share was $0.35, which was up 21% year-over-year. Operating cash flow was very strong at $13 million, up 64% versus last year. We believe that the strength of our team, our robust business model of providing proprietary mission critical functionality in diversified end-markets and our increasing exposure to the medical market is serving us well in this modest growth environment. In the quarter, we saw broad based growth momentum across the Company with high single-digit or double-digit year-over-year growth in most of our businesses. In the fourth quarter, our JADAK data collection business, the photonic segment, and our Celera Motion business, were strongest with double-digit year-over-year revenue growth. Bookings performance was solid with growth of 9.6% versus last year and a book-to-bill for the full-year of 1.05%. You will hear more details on the quarter and the outlook from Robert, but the strong fourth quarter results positioned the Company very well to execute on our 2017 guidance. Doing part of our fourth quarter results, we did closed two exciting acquisitions in the beginning of 2017. We acquired ThingMagic and increased our stake in Laser Quantum from 41% to approximately 76%. These acquisitions further are strategy to increase our presence in medical markets. Including these acquisitions,…

Thank you, Matthijs. We delivered $99 million in revenue in the fourth quarter of 2016, an increase of 10%. The impact of foreign currency on revenue in the quarter was a negative 1%, while acquisitions and divestitures contributed roughly 12%. Organic growth was 10% year-over-year. Fourth quarter GAAP gross profit was $43 million or 43.3% of sales this compared to $37 million or 40.6% margin in the fourth quarter of 2015. On a non-GAAP basis, fourth quarter adjusted gross profit was $44 million or 44.3% of sales compared to $38 million or 42.2% in the fourth quarter of 2015. The increase in gross margins year-over-year was driven by higher revenues and improvements from our continuous improvement productivity initiative. Additionally, we also experienced growth in some of our higher margin product lines versus a year ago. This was partially offset by prior period acquisitions, which had lower growth margins than our existing businesses. Over the course of 2017, we expect to improve the gross margins of the acquired businesses to accompany average or better. R&D expenses were $8 million or 8.1% of sales versus $7 million or 8.1% of sales in the prior year. SG&A expenses were $19 million or 19.6% of sales. This compared to $19 million or 21.1% of sales in the fourth quarter of 2015. Despite the increase in sales, we kept SG&A dollars relatively flat. GAAP operating income was $11 million in the fourth quarter of 2016 compared to $4 million in the fourth quarter of 2015. Whereas non-GAAP operating income was $17 million or 16.8% of sales compared to $12 million or 13.0% of sales in the prior period. As Matthijs mentioned, adjusted EBITDA was up nearly 35% year-over-year and $19.4 million or roughly 20% of sales in the quarter versus $14.4 million in the prior…

[Operator Instruction] Your first question comes from Lee Jagoda from CJS Securities. Your line is open.

So starting with Laser Quantum, can you talk a little more about the current customer mix, the current mix of end markets? And why you believed it was time now to take your equity interest up given what's going on in the cycle et cetera?

So as we reported, Lee, Laser Quantum has a very strong position in the DNA sequencing market, that’s a pretty consolidated customer market. But they also have an increasing presence in other bio photonics market. And we feel that with the Novanta sales forces, we can actually help them to diversify into those of our customers where actually Novanta has a strong presence. And the combination of their technology and our market strength we feel is a very good combination.

And then just looking at the financials, how should we think about both gross margins at Laser Quantum versus your core, and things like tax rate given their UK presence?

Yes. Their gross margins are higher than the gross margins of Novanta's average, that’s a benefit for us I won’t go in the specifics there. But that’s certainly a benefit, that’s not been the case in some of our prior acquisitions where we had to drive cost reductions and get additional leverage. So, it's nice to have something that’s got gross margin above where we currently report. It's got a much lower tax rate. I think the statutory rate in the UK is somewhere around 17%, and will continue to drop. And so from that perspective, it should generate some nice cash flows as well.

Then switching gears a little bit on ThingMagic. It appears to be a pretty good fit given some of the IP you previously acquired. Are there other areas where you think that you can make acquisitions where you have a similar dynamic, meaning your own one piece of the puzzle and there is another piece to go out? And if so where are those areas you’re looking?

Yes, we got multiple, Lee. It's hard of be super specific there of course, but one area that we commented on is in the precision motion space where it's a fragmented market and there is multiple pieces to the puzzle to come up with a total solution. And we have quite a few pieces of the puzzle, but we’d like to further add and we cannot do that organically or inorganically. So, we expect those to be active and continue to report in that area.

And then Robert, one last one for you, and assuming no additional changes in the U.S. tax code, which is always a fun assumption. You’ve made some really good progress on your non-GAAP tax rate in '17. What's the thought for that one over the next several years?

Yes, as we look at 2017, we’ll drive it down to something around 30%. I think there is additional opportunity there, even absent any changes in the U.S. tax structure. It does -- some of the rhetoric that’s been coming out in that area does give us a little pause, because I think we’re pretty well positioned from that regard. 60% of our revenue is shift outside of the U.S., the majority of our manufacturing is still done within the U.S. And so, we enjoyed a higher tax rate as a consequence of that. To the degree that changes, I think there is a big opportunity for us there. We just have to see how that unfolds in to what's in the details around that. But regardless of that, driving -- absent any changes in the U.S., I think the 30% next year and that continuing to drop maybe another hundred basis points the year after is something that we feel we can achieve with this structure

And I don't know if I missed it or we didn't have it yet. But did you give CapEx guidance for 2017?

We did not. I don't think it's going to be materially different than where we’ve finished off this year. We have some additional ERP investments that we need to make to finish off the implementation through the other one-third of the business. So, somewhere in the range of what we reported this year is probably fine.

Your next question comes from Jared Berlin from Thames Capital Management. Your line is open.

It seems like M&A going to be an increasingly important part of the strategy going forward for the next several years. And I was wondering if you could just detail for me the criteria around which or the framework around which you think about M&A from the perspective of financials with the ROI you're looking for over what period of time. And then how should we think about the rate fundamental fit for these acquisitions? Thank you.

Let me start with commenting on just the strategic part, and then Robert will comment on the financial criteria part. Our business model is really around proprietary mission critical functionality to OEM equipment makers in advanced industrial and medical markets. And we've been very active with our acquisitions to increase our medical presence. So, that's kind of a strategic framework. So we really, when we acquire companies, we want that business model fit and that market fit to be there. And then if you look from a grid of technology and markets, we either want to further enhance our technology position in existing markets like what we have done in let's say the RFID acquisition we've recently done, or actually further enhance our technology positions in target end markets, increasing dollar content in target end markets like minimally invasive surgery, life sciences and so on. And that could extend to additional product categories, provided that we see good cross-selling opportunities with our existing medical customer base. So that's how you need to look at it strategically. When we went out last year and provided the vision to double the Company, so we were up at roughly $375 million at that time, so doubling to $750 million. We said that about one-third would be through organic growth, which is 5% to 7% organic growth and number, which with the recent organic growth performance that we have we're comfortable in hitting. And then the other two-thirds with acquisitions and the two recent acquisitions are already a good step in the right direction there. So, that's kind of the -- there's a strategic framework the way we think about. And Robert can further comment on the financial criteria that are very important to us.

So, from a financial perspective, we generally focus on cash returns. So we look at cash on cash returns that have to accretive to our own returns. We look at return on invested capital. We have a minimum requirement of 10% by year two for any bolt-on and then larger platforms we’ll look on a case-by-case basis. And we also look for some revenue growth accretion to our existing portfolio. So we don't focus a whole lot on just pure earnings accretion, but that's largely because everything nowadays is only accretive given the cost of debt is nearly zero.

[Operator Instructions] Your next question comes from Christopher Hillary from Roubaix Capital. Your line is open.

I wanted to ask in both your industrial medical end-markets, you note robotics and automation as one of the applications. Can you share with us how large that is of the segments and then perhaps are those areas that are growing faster than the overall portfolio?

We haven’t split out and we're not going to do that in this call with those numbers. But I can tell you that those opportunities are growing at high single-digit or double-digit for us. We are leader in providing precision motion solutions for robotic surgery. And I'm sure you can read-up on that market, which we feel was attractive long-term. Also, laboratory automation, basically increasing throughput and precision of lab equipment requires precision motion, and we’re well positioned there. And on the industrial side, I think there is a lot of news around automation and robotics. We have a niche position there. But applications like autonomous vehicles or warehouse automation are good applications for us that are relatively small but are fast growing. So, that's how you need to see. We think that long-term overtime those will become more dominant applications for us, and the growth from a relatively small base and we're going to add to it organically and inorganically.

And then if I may add one other question, which is we've seen a lot of strength in these manufacturing surveys so called from the soft data. I wanted to ask if you are seeing any change in the cadence of business in your industrial end-markets given there seems to be an usually high amount of optimism reflected in these surveys currently?

We’re reading the same surveys of course I mean, while we look at them. But primarily we're looking and discussing with our direct customers and looking across different applications what's happening. As we reported in the fourth quarter we saw an improved advance industrial market momentum, so we're seeing that as well. And we feel good about 2017 from that remark from that perspective. Now, having said that, we're not going to be dependent on market alone, we're increasing share by introducing new products and by expanding our sales forces. So no matter what the cycle, we feel will do better. And we’re well positioned and we’re introducing new products and expanding in new markets and regions, so that's how you need to look at us quite frankly.

There are no further questions, at this time. I turn the call back over to Matthijs Glastra for closing remarks.

Thank you, Operator. So, to summarize, I would say we're very proud of our accomplishments in 2016 and how we finished off the year. We successfully rebranded the Company. We seamlessly transitioned our Company's leadership. And our focus on accelerating profitable growth was evident in our strong financial results. The diversity and strength of our businesses have served as well in this modest growth environment. We feel that our strategic direction with an increasing exposure from medical markets positions us well. As discussed before, we're now entering the growth phase in our transformation journey focused on multiple growth drivers. We have leading positions in growth markets. We’re expanding our served markets through innovation in M&A with focus on expanding our medical presence. We are achieving deeper market penetration globally through a stronger and larger sales force. All of this while maintaining our commitment to disciplined execution and our continuous improvement businesses. We appreciate your interest in the Company and your participation in today's call. I look forward to joining all of you in a few months on our first quarter earnings call. Thank you very much and this call is now adjourned.

This concludes today's conference call. You may now disconnect.